Reorienting Finance Towards Energy Efficiency in the UK

This paper examines the challenges associated with stimulating large-scale investment in energy efficiency and demand management measures. We focus on institutional changes necessary for mainstream financial institutions, such as pension funds and insurance companies, to seriously address efficiency and demand side issues. This draws on recent literature on green finance to examine the role of financial institutions in transforming energy systems. Recent policy-oriented research has proposed framing energy efficiency as a core part of infrastructure investment. This could enable appraising multiple social and environmental benefits of energy efficiency, and overcoming accounting rules which hinder fair treatment of energy efficiency investments. We explore how this could be applied in the UK context to fill the policy vacuum left by the failure of the Green Deal. We examine the potential for this to deliver comparable benefits to other major infrastructure investments, with the added benefit of reducing supply-side investment needs and thereby the risk of stranded assets.

However, this type of reorientation of energy efficiency policies would require commitment from the mainstream investment community, which faces structural as well as behavioural constraints on investing in low carbon options. We examine the roles of potential funding vehicles including the Green Investment Bank and green bonds, learn from a large scale publicly funded domestic energy efficiency project, and consider new proposed models, such as revolving funds financed by private investment. We draw interim conclusions and outline how future research will draw on interviews with members of the investment community, in order to examine what further measures may be needed to overcome structural and behavioural constraints to large-scale investment in energy efficiency and demand management measures.